Time for advisers to head back to school

Private banks in the UK have been busy launching new offerings, compliant with latest regulatory requirements of the Retail Distribution Review (RDR).

Their counterparts in Europe, expecting imminent local versions of these far reaching regulations, are watching closely.

Overnight, relationship managers (RMs) have been forced to make sure they know exactly what they are talking about when it comes to investment. The days of the generalist “blagger” are over.

The implications cannot be overstated. Entire business models must be re-shaped, coupled with huge investment in expensive education programmes.

Coutts has just finished a major internal “re-education” process, with all RMs subsequently re-applying for their old jobs. At Citi, RDR is seen as the biggest challenge to the bank’s business model. It is more pressing than the Fatca regulations, rustled up in the US or any tax-led challenges with Swiss authorities which eventually led to the downfall of Wegelin.

Citi’s private banking board spends up to 75 per cent of its time dealing with regulatory matters – compared to 10 per cent five years ago – with RDR taking up by far the lion’s share.

All of Citi’s 20 UK RMs have gone through a six-week training course and some have been asked to attend it twice. Preparations are underway for all the group’s 187 bankers in Europe, the Middle East and Africa to go through similarly rigorous training. This includes not just equity, bonds and structured products, but also more complex private equity, hedge and distressed debt strategies..

These regulatory-led changes come in parallel with Citi’s shake-up of its portfolio management, which will allow more frequent rebalancing and uses data points going back to 1910, for analysis of risky scenarios. Latest calculations have led to a more prominent core European equity holding, concentrating on high dividendpaying stocks.

Clients will have to get used to paying for these asset allocation services, with kickbacks from chosen fund managers effectively outlawed. The conversation is already a tetchy one, with clients demanding to know how big these commissions were in the past.As part of the move to a feepaying model, it has long been the wish of private banks to convert occasional, advisory clients to full discretionary portfolio management – where they hand over assets in exchange for substantial charges. But many are coming to realise this is not entirely realistic, as discretionary clients burned in previous crises have little inclination to delegate assets.

Through exposure to Asia, European banks have become conscious of the need to focus on specific asset classes and types of investment to mark their niche. Clients might be prepared to delegate part of their portfolio – Asian fixed income for instance – to a particular private bank, but any more may be pushing it. There is no easy way to monetise “double digit” Asian growth. After the initial euphoria of setting up far from home, there is a creeping realisation that decent pickings with higher margins can still be had from private banking heartlands in Germany, Benelux and France. Far from giving up their birthright to concentrate on foreign markets, the likes of French Société Générale and Dutch ABN Amro are making sure to strengthen operations on their own doorstep.

For ABN Amro, this means boosting trusted local brands Neuflize in France and Bethmann Bank in Germany, rather than subsuming them with the resurgent Dutch master-franchise.

For SocGen, it is about looking inside the group, following crossselling pioneers HSBC, and making sure RMs learn about the investment bank’s structured products, financing and merger/arbitrage facilities, through a joint investment banking and wealth management initiative.

Whether such an initiative is driven by regulation or commercial needs, advisers have to educate themselves about what their clients need, and fast.